According to Chron, only 1.5% of businesses continue to see a third generation of management. Perpetuation planning is essential to business continuity and should begin as soon as you acquire a company. Although proper perpetuation planning doesn’t require immediate action, it does require extensive consideration. Proper perpetuation planning allows you to step back and see your business grow under new generations of management. It gives you access to ongoing income without requiring you to stay aboard as an active employee. It also allows you to successfully transition your company to new ownership in the event you want to step down as the owner. More so, it ensures a successful transition of ownership in the event you were to pass away. Let’s take a close look at business continuity and the importance of a proper perpetuation plan.
Why Do Companies Need a Perpetuation Plan?
A perpetuation plan proves of value not only when changing hands of ownership, but also when facing unforeseen circumstances, like the sudden death of the owner. This plan also proves of benefit during times of economic downturns. Without a perpetuation plan, it becomes difficult to serve the best interests of the owner and any employees. Perpetuation plans enable businesses to take advantage of positive market opportunities while avoiding situations that threaten their survival.
How to Create a Strategic Perpetuation Plan
Most perpetuation plans outline buy-sell agreements between the business and its owners. If one of the owners was to pass away, this ensures the remaining owners have the option to purchase the deceased owner’s shares of the company, which facilitates company growth. When creating the buy-sell agreement, it’s imperative to account for income an estate tax needs.
A successful perpetuation plan will also outline corporate life insurance needs for any of the principals; this is, of course, in addition to any personal life insurance needs. The structure of the corporate life insurance policy should carefully uphold liquidity for the company to ensure the surviving owners can purchase the deceased owner’s shares. With this type of policy, there will be a payout to the company, its owners, or its heirs in the event of death.
Another important aspect to address in a perpetuation plan is the formation of limited liability companies. These companies can act as holding companies for the interests and assets of the business. The companies should be put into the names of family members or partners. In doing so, company ownership can easily transfer among these entities without losing operating control.
Although perpetuation planning should begin as soon as you acquire a company, this doesn’t mean you can’t start now. If you need help with creating a perpetuation plan, please don’t hesitate to reach out to us today.
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